The Relationship Between Carporation Income and Liquidity and its Influence on Dividend

For many years, dividend policy has been one of the considerable challenges of finance literature. Probably, the best model describing the relation between changes of EPS and dividend is that of Lintner (1956). In his classic study, Lintner states that corporations’ dividend policy is to distribute a fixed dollar amount of yearly income. However, traditional manipulation models of Lintner (1956) and Fama and Babiak (1968) demonstrate that the amount of dividend is determined according to corporations’ current and previous incomes.Many researchers have already studied the factors affecting dividend policy. Having reviewed those studies and comparing their results, the present paper investigates the relationship of corporations’ income and liquidity with their dividends. This paper also investigates the effect of industry on the considered relationship.Having applied group sampling model, hypotheses of this study have been tested using linear multivariable regression analysis and variance analysis, and also incorporating virtual variables in multivariable regression. EPS has been considered as a measure of income for the year t and sum of net cash balance and dividend (net cash flow before distribution of dividend) at the year t+1 as a measure of liquidity.The results of this study shows a strong relation between income and dividend. It also shows that the relation of liquidity and dividend is slight and negligible, while it demonstrates no influence on dividend by industry.